||This article has an unclear citation style. (March 2012)|
According to section 14 of the Inland Reveue Ordinance (IRO) (cap. 112, Laws of Hong Kong), unless otherwise provided, profits tax shall be charged at the standard rate on any person who carries on a trade, profession or business in Hong Kong and assessable profits arising in or derived from Hong Kong for a year of assessment.
The formula is:
- HK profits tax payable = Net assessable profit × Profits tax standard rate
- Net assessable profit = Assessable profit − Loss brought forward (if any) + Loss transferred from partnership (if any)
- Assessable profit = Profit or (Loss) per financial account + (Disallowable expenses charged in account − Non-taxable income credited in account) − Depreciation allowances − Approved charitable donations
Approved charitable donations
The Approved charitable donations are limited to 10% of the amount after deducting of the Depreciation allowances, per section 16D of the IRO. And after the amendment recently, it is changed to 25% of the amount after deduction of Depreciation allowances
Year of Assessment
The period of assessment mostly is from 1 April to 31 March of the following year, but it is up to taxpayer's wish with reasonable excuse. The example is financial year of the business.
- A person carries on a trade, a profession or a business in Hong Kong
- There are profits arising in or derived from (trade, profession, business). Profit is not from the sales of capital assets
- The profits must be arising in or derived from Hong Kong
- Contract effected test
- Operation test
- Provision of credit test
- Development test or registration test
Badges of Trade
Any trade may be subject to profit tax unless a reasonable man can provide evidence to proof that there is not any revenue profit. In Hong Kong, capital profit is not subject to tax.
In order to prove the nature of a trade, the badges of trade are to be considered:
- the taxpayer's intention of profit (one acquisition of the commodity)
- Subject Matter of the commodity disposal (If enjoyment can be assume on original acquisition, e.g. rental)
- the length of ownership,
- frequency of similar transactions,
- reason for disposal,
- supplementary work and so on.
- Inland Revenue Department (Hong Kong)
- Section 5 of the IRO - Property tax
- Section 8 of the IRO - Salaries tax